Maine Voices: Not all high incomes are equal

SCARBOROUGH – The discourse regarding whether we should extend or not extend the Bush tax cuts for families earning over $250,000 per year emerged as a divisive argument going into the November elections.

While the political left positions this as an argument between the haves and have-nots, those on the right attempt to persuade voters that this is an argument between job creation and job destruction.

However, few have made clear why these tax cuts are important to small-business growth and, in turn, job creation.

My argument why these tax cuts are important centers not around what is fair — I will leave that argument to the politicians. What I would like to help people understand is how lower taxes very clearly help small businesses grow.

My intent is to offer a practical argument instead of an ideological one. Before readers jump to the conclusion that I am just another conservative business owner seeking to line my own pocket, let me put things into perspective.

I describe myself as a fiscally conservative, socially liberal voter. The fact that gay people cannot marry in the majority of states boggles my mind.

I voted for President Obama and would vote for him again in a second, based on his track record thus far.

His health care plan has some major flaws that I expect will be fixed. Yet, our company looks forward to the added benefits this plan will provide our employees over our current health care plan.

If the Republicans vote to repeal the current legislation instead of working to improve it, then it will be decades before my anger subsides to vote again for a Republican.

Conversely, if both sides of the aisle fail to make difficult cost-cutting decisions to control our debt, then neither side will earn my vote. Tax policy can be less than straightforward even among similar tax brackets.

A corporate executive making millions of dollars per year does not really earn my sympathy if he or she must pay 4.6 percent more in income taxes.

However, a small-business owner “earning” more than $250,000 a year is not in the same camp. Here’s why:

Our Portland business has been growing 20 percent to 50 percent for the last three years. This growth has come about because we have taken some calculated risks, we have worked hard, and we are lucky to have some incredible employees.

To maintain this growth requires money, including capital for investment in the future of the company. But as a limited liability partnership, our profits flow to our personal tax return, where they are taxed at the prevailing federal and state income tax rates.

Let’s say our business will end 2010 with $3 million in sales and a 10 percent profit of $300,000. As the owner, this $300,000 profit will flow to our personal return.

Now many will say, who are we to complain if we earn $300,000 even if we have to pay an additional 4.6 percent (by letting the tax cuts expire).

However, if we grow our business 20 percent in 2011 then that will add another $600,000 in sales.

In our business, to add $600,000 in sales will require approximately $200,000 of additional cash flow in order to purchase inventory to support this new business.

Inventory is not tax deductible, so we must either grow by using cash flow from profits or borrow more money.

The difference we will pay on this $300,000 in profits between current tax rates and the higher rates is $13,800 ($129,600 versus $143,400 combined federal and Maine state taxes).

If this does not sound like an amount worth arguing over, then I doubt the reader has ever run a small, growing business.

The higher this income is taxed, the less I can grow. The less I can grow, the fewer employees I can afford to hire.

My argument is very simply an argument of how difficult it is for small businesses to grow, especially with so little access to capital.

If we as a society want more jobs, then we need to recognize that there is a difference between a small-business owner with $500,000 in profits and a corporate executive earning a salary of $500,000.

If we believe the premise that small businesses fuel job growth in this country, then perhaps it is time that this difference is reflected in our state’s and our country’s tax policies.

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